Securities Industry Commentator by Bill Singer Esq

July 25, 2019

In response to a Complaint filed in the United States District Court for the District of Columbia, Facebook entered into a Stipulated Order for Civil Penalty, monetary Jugment, and Injunctive Relief with DOJ and the Federal Trade Commission ("FTC") whereby Facebook agreed to implement compliance measures to improve user privacy and provide additional protections for user information; and to pay a $5 billion civil penalty (purportedly the largest such penalty imposed in an FTC case). As set forth in part in the DOJ Release:

[F]acebook violated an administrative order issued by the FTC in 2012 by misleading users about the extent to which third-party application developers could access users' personal information. The complaint further alleges that Facebook violated the Federal Trade Commission Act by deceiving users about their use of this and additional sensitive information.

As reflected in the stipulated order filed with the complaint, Facebook has agreed to settle these allegations by paying a $5 billion civil penalty and implementing robust, new compliance measures that will change how Facebook prioritizes and approaches user privacy issues. These new compliance measures include appointment of an independent assessor to monitor Facebook's conduct, privacy reviews for all new or modified Facebook products, establishment of a new Independent Privacy Committee on Facebook's Board of Directors, annual compliance certifications by Facebook CEO Mark Zuckerberg, and various reporting and record-keeping requirements. Under the stipulated order, the Department of Justice and FTC will share responsibility for monitoring and enforcing Facebook's compliance.

In response to a Complaint filed in the United States District Court for the Northern District of California by the SEC, and without Without admitting or denying the SEC's allegations, Facebook Inc. agreed to the entry of a final judgment ordering a $100 million penalty and permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(a) of the Securities Exchange Act, and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder. As set forth in part in the SEC Release:

[I]n  2014 and 2015, the now-defunct advertising and data analytics company, Cambridge Analytica, paid an academic researcher, through a company he controlled, to collect and transfer data from Facebook to create personality scores for approximately 30 million Americans.  In addition to the personality scores, the researcher, in violation of Facebook's policies, also transferred to Cambridge Analytica the underlying Facebook user data, including names, genders, locations, birthdays, and "page likes."  Cambridge Analytica used this information in connection with its political advertising activities. 

The SEC's complaint alleges that Facebook discovered the misuse of its users' information in 2015, but did not correct its existing disclosure for more than two years.  Instead, Facebook continued to tell investors that "our users' data may be improperly accessed, used or disclosed." (emphasis added)  According to the SEC complaint, Facebook reinforced this false impression when it told news reporters who were investigating Cambridge Analytica's use of Facebook user data that it had discovered no evidence of wrongdoing.  When the company finally did disclose the incident in March 2018, its stock price dropped.

The complaint further alleges that during this two-year period, Facebook had no specific policies or procedures in place to assess the results of their investigation for the purposes of making accurate disclosures in Facebook's public filings.
In an Indictment filed in the United States District Court for the District of New Jersey, William Green was charged with one count of operating an unlicensed money transmitting business.  As set forth in part in the DOJ Release:

Green maintained a business that operated a website called "Destination Bitcoin."  Through the Destination Bitcoin website, Green received money from members of the public (the "customers"), deposited such money into bank accounts maintained by Green, and then converted such money into Bitcoin in accordance with the customers' instructions.  Green charged the customers a fee for this service.

Federal law provides that any person who owns or controls a money transmitting business shall register the business (whether or not the business is licensed as a money transmitting business in any State) with the Secretary of the Treasury.  However, Green did not register, either in his own name or in the name of his business, with the Secretary of the United States Treasury as a money transmitting business.
I am taking the month of August off from writing the column. I'll spend part of that time rereading what I've written. I'm curious which of my past year's views I still agree with. All conclusions are inherently tentative, because none of us is omniscient. Opinions should change as life and the world changes, which they always do. We waste time holding back that tide. Send a train of thought barreling down one fork and you arrive at a terminal entirely inconsistent to the one you would have reached by the other fork. If you go down both forks at the same time -- which is what real thinking entails -- sooner or later you'll contradict yourself. It's ok. I -- and you too -- contain multitudes.
In a Complaint filed in the United States District Court for the District of Utah, the SEC charged Landon M. Smith with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder, and the registration provisions of Section 5 of the Securities Act. Smith has agreed to a bifurcated settlement where he will be permanently enjoined from violating these provisions but reserves the issues of disgorgement, prejudgment interest, and a civil penalty for further determination by the Court. DOJ is pursuing parallel criminal charges against Smith. As set forth in part in the SEC Release:

[F]rom at least December 2016 through April 2018, Smith operated a fraudulent scheme that raised nearly $2.5 million from over fifty investors. To entice investors, Smith allegedly falsely told them that he was a real estate wholesaler who used investor funds for earnest money to purchase and then quickly resell properties. Smith also allegedly promised investors returns of up to 100%. The SEC's complaint alleges, however, that Smith never purchased the purported properties. Instead, Smith allegedly used new investor funds to pay returns to earlier investors in a classic Ponzi scheme fashion and to pay his personal expenses, including his rent and trips to Hawaii. To conceal his fraudulent scheme, Smith also created false real estate contracts with forged property owner's signatures.

Top Management and Performance Challenges Facing Financial-Sector Regulatory Organizations (Report of the Council of Inspectors General on Financial Oversight)
The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Council of Inspectors General on Financial Oversight ("CIGFO") to oversee the Financial Stability Oversight Council ("FSOC") and suggest measures to improve financial oversight. CIGFO members include the Inspectors General of the Department of the Treasury, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Department of Housing and Urban Development, the Board of Governors of the Federal Reserve System and the Bureau of Consumer Financial Protection, the Federal Housing Finance Agency, the National Credit Union Administration, the Securities and Exchange Commission, and the Special Inspector General for the Troubled Asset Relief Program. The CIGFO Report sets out seven challenges for 2019:
  1. Enhancing Oversight of Financial Institution Cybersecurity
  2. Managing and Securing Information Technology at Regulatory Organizations
  3. Sharing Threat Information
  4. Ensuring Readiness for Crises
  5. Strengthening Agency Governance
  6. Managing Human Capital
  7. Improving Contract and Grant Management